Federal Reserve Bank of New York · Beige Book

Federal Reserve Bank of New York

Summary of Economic Activity

T1Economic growth in the Second District slowed to a crawl in the latest reporting period, as demand from households and businesses weakened amidst ongoing labor shortages, supply backlogs, and elevated Covid levels. Business optimism about the near-term outlook has also eroded further. T2Businesses continued to report widespread increases in selling prices, input prices, and wages, as well as ongoing difficulty obtaining necessary supplies. Despite severe labor shortages and high turnover, businesses have continued to add workers and plan to continue doing so in the second half of the year. Both manufacturing activity and consumer spending have been flat in recent weeks, while tourism activity has accelerated. There were pronounced signs of easing in the home sales market, whereas the rental market was increasingly robust.

Commercial real estate markets were mixed but generally steady. Construction activity has picked up, with a good deal of multifamily residential development in progress. Finance-sector contacts reported some weakening in activity, while regional banks reported widespread declines in loan demand and refinancing activity, as well as tighter credit standards and steady delinquencies.

Labor Markets

T3Businesses continued to report widespread labor shortages, restraining both new hiring and retention, though one employment agency noted that workers have become more reluctant to change jobs. Particularly acute labor shortages were reported in technology and healthcare occupations. Still, a sizable proportion of businesses indicated that they continue to add staff—particularly in the wholesale trade and information sectors, as well as in transportation and professional & business services. One contact noted increasing job openings for call centers. Firms in all major industry sectors except finance plan to add staff in the second half of this year.

Businesses continued to note widespread wage increases and anticipated further increases in the months ahead. One employment agency noted that more employees are using counter-offers to raise their salaries in their current jobs. Wage gains have been most pronounced in the construction, transportation, and warehousing sectors.

Prices

Most business contacts noted ongoing broad-based escalation in input prices. In particular, escalating costs for both energy and freight continued to be cited widely. In the construction sector, while lumber prices have eased, costs of engineered wood products (e.g., doors and windows) have reportedly continued to rise. Contacts across the board expect input prices to rise further in the months ahead.

Businesses continued to note widespread escalation in their selling prices, particularly in the manufacturing and distribution industries. A majority of businesses said they plan further price hikes in the months ahead.

Consumer Spending

T4Consumer spending has been essentially flat in recent weeks. Non-auto retailers reported that business has been steady to weaker in the latest reporting period. Contacts have also become more pessimistic about the near-term outlook. Auto dealers in upstate New York reported that sales of both new and used vehicles have been sluggish in recent weeks, largely reflecting the ongoing lack of inventory, as well as affordability issues. Consumer confidence among New York State residents fell in May but rebounded modestly in June; it is roughly on par with pre-pandemic levels and still fairly high by historical standards.

Manufacturing and Distribution

Manufacturing activity has been essentially flat since the last report, but growth picked up somewhat in the wholesale trade industry and remained moderately strong in the transportation & warehousing industry. For the first time in well over a year, manufacturers reported a slight decline in unfilled orders, and expect that these, as well as delivery times, will decline noticeably in the months ahead. T5Contacts have yet to see improvement in supply availability, but manufacturers expect disruptions and delays to diminish over the second half of this year.

Services

Activity in the service sector has remained essentially flat in the latest reporting period. Professional & business service firms indicated a slight increase in activity, whereas education & health service providers saw a slight decline. Contacts in the information and leisure & hospitality sectors noted a pause in growth. Businesses in these sectors remain mildly optimistic about the near-term outlook.

T6In New York City, however, tourism has continued to flourish. A local industry expert noted that both business travel and international visitors have picked up to a surprising degree in recent weeks, though visits from Asia continue to lag (mainly attributed to home country restrictions). Removal of inbound restrictions in the U.S. seems to be boosting visits, and this trend is expected to continue. Manhattan's hotel occupancy rate has now rebounded to over 75 percent, with mid-week occupancy surpassing weekend levels at around 90 percent—partly due to longer stays and more business travelers. Occupancy is now roughly on par with pre-pandemic levels. While a number of hotels are still housing the homeless, as well as emergency personnel and health workers, this now accounts for under 10 percent of occupancy.

In addition, the average daily room rate has climbed above pre-pandemic levels to well above $300. With business on the rebound, some closed hotels have reopened or plan to do so soon. Attendance at trade shows and medium to large corporate meetings have trended up, and out-year bookings have also picked up.

Real Estate and Construction

T7Housing markets have been mixed since the last report, with the rental market continuing to strengthen but the sales market weakening noticeably. Both in New York City and across the metropolitan region, there has been a steady and pronounced decline in signed contracts in both May and June, going against normal seasonal trends. A leading local real estate authority attributed this drop-off in sales to a combination of low affordability, rising mortgage rates, and increased uncertainty. There has also been a rise in the inventory of available homes—though it is still quite low—but not a reduction in prices thus far. Real estate contacts in upstate New York continued to characterize the market as strong, though less so than in recent months—for instance, bidding wars still occur but with fewer bidders competing and some sellers have lowered their asking prices.

In contrast, residential rental markets have strengthened noticeably, with substantial escalation in rents, low vacancy rates, and brisk leasing activity. In New York City, rents rose sharply during the 2nd quarter, setting new records, and rental vacancy rates are at a 20-year low. Rents have also risen sharply in upstate New York. With rents rebounding to well above pre-pandemic levels in New York City and elsewhere, affordability has been a widespread and growing concern.

Commercial real estate markets have been mixed since the last report. Office markets across the District were steady to slightly weaker, with vacancy rates edging up in Manhattan and the Lower Hudson Valley but little changed elsewhere. Office rents were flat to up slightly and close to pre-pandemic levels, except in Manhattan. The industrial market has remained firm, with vacancy rates leveling off but rents continuing to rise briskly. The market for retail space has remained sluggish.

Construction activity has been mixed but picked up somewhat overall. Nonresidential construction starts have remained exceptionally low, whereas multifamily residential construction starts have increased across most of the District, with the notable exception of Manhattan—though even there a sizable volume of construction is still in progress.

Banking and Finance

Contacts in the broad finance sector reported marked worsening in the general business climate, a decline in activity, and growing pessimism about the near-term outlook. Bankers reported lower loan demand across all consumer and business loan segments. Refinancing activity also decreased. Credit standards tightened somewhat across all loan categories, while delinquency rates were little changed.

For more information about District economic conditions visit: www.newyorkfed.org/regional‐economy